Experts split on Trump’s top NAFTA pledge

The Globe and Mail (Prairie Edition) - - NEWS - ADRIAN MOR­ROW

U.S. Pres­i­dent is com­mit­ted to cut­ting his coun­try’s trade deficit, but some econ­o­mists ar­gue do­ing so could hurt rather than help

Inthe count­down to the con­tentious rene­go­ti­a­tion of the North Amer­i­can free-trade agree­ment, U.S. Pres­i­dent Don­ald Trump is hold­ing firm to a con­tro­ver­sial prom­ise that would up­end a quar­ter-cen­tury of glob­al­iza­tion on the con­ti­nent: slash­ing the United States’ long-run­ning trade deficit.

But whether the trade deficit is ac­tu­ally a prob­lem at all is a mat­ter of de­bate among econ­o­mists. And some experts and busi­nesses warn that tack­ling the deficit by re­strict­ing im­ports from for­eign coun­tries could dam­age the U.S. econ­omy and ex­ac­er­bate the prob­lems Mr. Trump is try­ing to solve.

What’s more, Mr. Trump’s ap­proach con­tra­dicts much of his own Repub­li­can Party’s free-mar­ket or­tho­doxy – an im­por­tant fac­tor in the United States, where Congress must sign off on any trade deal.

The United States’ NAFTA part­ners, mean­while, are try­ing to find ways to al­low Mr. Trump to claim vic­tory on the pledge while cir­cum­vent­ing it – such as by open­ing mar­kets fur­ther and al­low­ing the United States to boost its ex­ports with­out un­der­cut­ting the cur­rent agree­ment.

When ne­go­ti­a­tions get un­der way Aug. 16 in Wash­ing­ton, Canada and Mex­ico will pri­mar­ily be push­ing to pre­serve as much of the cur­rent mar­ket ac­cess as pos­si­ble, while eas­ing re­stric­tions in some ar­eas – look­ing for greater labour mo­bil­ity, par­tic­u­larly for pro­fes­sion­als, for in­stance. And on some mat­ters, such as up­dat­ing the deal to cover dig­i­tal com­merce, all three coun­tries are broadly aligned. But it is the U.S. de­ter­mi­na­tion to de­liver a vic­tory for Mr. Trump’s “America first” agenda that could dominate the talks.

The Pres­i­dent’s trade czar, Robert Lighthizer, cited the trade deficit with Mex­ico as the top prob­lem with the NAFTA. “The re­sult of that is there are a lot of peo­ple in Ohio and in in­dus­trial states that lost their job,” he said in an in­ter­view with ra­dio host Kevin McCullough out­side the White House last month.

Since 1976, the United States has im­ported more than it has ex­ported: Im­ports last year were $2.7-tril­lion (U.S.) and ex­ports $2.2-tril­lion, for a deficit of $502bil­lion.

Mr. Trump blames this deficit on com­pa­nies mov­ing jobs, par­tic­u­larly in the man­u­fac­tur­ing sec­tor, to Mex­ico, China and other coun­tries. He also con­tends that “cheat­ing” by other coun­tries – such as by of­fer­ing gov­ern­ment sub­si­dies to their own firms to bet­ter com­pete with Amer­i­can ones – is be­hind the deficit.

The Pres­i­dent’s ar­gu­ment is fairly straight­for­ward: If more of those goods and ser­vices were pur­chased from Amer­i­can com­pa­nies in­stead of for­eign ones, it would cre­ate more jobs in the United States. “It’s very un­fair for them to take our com­pa­nies, build their cars, and then sell the car back into our coun­try,” Mr. Trump told The Wall Street Jour­nal last month.

The United States’ trade deficit with Mex­ico last year was $55.6bil­lion, driven largely by con­sumer goods – from au­tos to T-shirts – man­u­fac­tured south of the bor­der and im­ported by the United States. The deficit in goods trade was $63.2-bil­lion, while in serv- ices, the coun­try ran a $7.6-bil­lion sur­plus.

The Trump ad­min­is­tra­tion seems less con­cerned with the U.S. bal­ance of trade with Canada: Last year, it was $12.5-bil­lion in the United States’s favour – a $12.1-bil­lion deficit in goods, off­set by a $24.6-bil­lion sur­plus in ser­vices. The rea­son for the goods deficit is largely im­ports of oil by the United States, which can­not pro­duce enough to meet its own de­mand.

Mr. Lighthizer’s 17-page list of ob­jec­tives for the NAFTA talks in­cludes: “Im­prove the U.S. trade bal­ance and re­duce the trade deficit with the NAFTA coun­tries” as the top goal. The list of­fers no de­tails how this will be achieved and Mr. Lighthizer did not elab­o­rate in his in­ter­view with Mr. McCullough. Mr. Lighthizer’s of­fice de­clined to an­swer ques­tions or to make him avail­able for an in­ter­view.

But to some trade experts, the trade deficit is a red her­ring.

The U.S. econ­omy has ex­panded nearly 1,000 per cent since 1976, when the coun­try started con­sis­tently run­ning trade deficits, ac­cord­ing to World Bank statis­tics.

Ac­cord­ing to num­bers from the U.S. Cham­ber of Com­merce, trade in the NAFTA zone has jumped to $1.3-tril­lion last year from $337bil­lion in 1993, the year be­fore the deal came into ef­fect.

The Trump ad­min­is­tra­tion ap­pears to see trade as some sort of zero-sum game, when it is ac­tu­ally about cre­at­ing the max­i­mum wealth pos­si­ble for ev­ery coun­try, said Daniel Iken­son, head of trade pol­icy re­search at the Cato In­sti­tute, a Wash­ing­ton­based free-mar­ket think tank.

“They see trade as a team sport com­pe­ti­tion be­tween na­tions, and it’s re­ally not. It’s not a con­test,” Mr. Iken­son said in an in­ter­view. “The im­por­tant met­rics are to­tal trade and to­tal eco­nomic growth. It doesn’t mat­ter what the bal­ances are. They would sac­ri­fice eco­nomic growth just to have trade bal­ance.”

While it is true that, be­cause of free trade, some com­pa­nies will fail or move to other coun­tries when ex­posed to new com­pe­ti­tion, Mr. Iken­son ar­gues that, as the mar­ket be­comes more ef­fi­cient, it cre­ates new jobs in other in­dus­tries. Cheaper T-shirts im­ported from Mex­ico, for in­stance, free up money for Amer­i­can con­sumers to spend on other goods from lo­cal com­pa­nies or put aside as sav­ings that are then in­vested in startup firms in ar­eas where the United States has an ad­van­tage – soft­ware de­vel­op­ment, for in­stance.

“You see a com­pany go out of busi­ness, a fac­tory that closes, but what you don’t see are the re­sources that have been saved that en­able the emer­gence of a new com­pany,” Mr. Iken­son said.

The ef­fi­cien­cies en­abled by free trade also mean that many goods are no longer sim­ply made in one coun­try and sold in an­other. Rather than com­pet­ing against each other, the coun­tries in­stead man­u­fac­ture prod­ucts to­gether.

Stephen La­mar, ex­ec­u­tive vi­cepres­i­dent of the Amer­i­can Ap­parel & Footwear As­so­ci­a­tion, cites the ex­am­ple of a pair of jeans: Cot­ton grown in Texas is spun into yarn at a mill in Alabama and turned into denim at a fac­tory in North Carolina, be­fore be­ing cut into pan­els and sewn into the fin­ished clothes at a plant in Mex­ico, then shipped back north for sale to Amer­i­can con­sumers.

“What ends up in your closet is a pair of jeans that says ‘Made in Mex­ico,’ but there’s all this U.S. con­tent that goes into it – not only the phys­i­cal ma­te­rial, but also the in­tel­lec­tual prop­erty, the de­sign, the qual­ity con­trol … 70 per cent of that pair of jeans is going to be U.S. value,” he said in an in­ter­view at his Wash­ing­ton of­fice.

Econ­o­mists also ar­gue that the pri­mary cause of the trade deficit isn’t ac­tu­ally cheat­ing by trad­ing part­ners – such as dol­ing out cor­po­rate sub­si­dies or writ­ing rules to ad­van­tage lo­cal com­pa­nies over U.S. com­peti­tors. Rather, they say, it has more to do with for­eign­ers in­vest­ing in the United States by buy­ing prop­erty and other as­sets, or snap­ping up debt.

“The ad­min­is­tra­tion’s fo­cus on the trade deficit as some­how the fault of our trade part­ners is mis­placed,” said Barry Bos­worth, se­nior fel­low in eco­nomic stud­ies at the Brook­ing In­sti­tu­tion in Wash­ing­ton. “The over­all trade deficit is a di­rect re­flec­tion of the no­to­ri­ously low rate of U.S. sav­ing rel­a­tive to our in­vest­ment needs … we im­port re­sources from abroad be­yond our ex­ports to pay for those needed in­vest­ments.”

What’s more, if the United States were to at­tempt to bal­ance the trade deficit with a spe­cific coun­try – say, by re­strict­ing im­ports from Mex­ico – the deficit would merely shift to other lowwage ju­ris­dic­tions, as com­pa­nies that had been based in Mex­ico moved else­where, Mr. Bos­worth con­tends.

“The dis­tri­bu­tion of that deficit among our trad­ing part­ners is of lit­tle eco­nomic con­se­quence – sim­i­lar to the old adage of whacka-mole,” Mr. Bos­worth wrote in an e-mail. “If we shut off trade with Mex­ico, it will ex­pand with other low-in­come coun­tries with com­pa­ra­ble pro­duc­tion net­works.”

Un­der the prin­ci­ple of the bal­ance of pay­ments, money that moves over­seas to buy im­ports re­turns to the United States in the form of in­vest­ment: This is be­cause a coun­try has to have the money to pur­chase its im­ports. If Amer­i­cans are buy­ing more im­ports than they are ex­port­ing, they must be get­ting the money from in­vest­ments.

Se­na­tor John Cornyn, a Texas Repub­li­can who chairs the Sen­ate sub­com­mit­tee on trade, sounded un­en­thu­si­as­tic about the Pres­i­dent’s ap­par­ent top pri­or­ity in NAFTA talks.

“I don’t think it’s the end-all, be-all, in terms of as­sess­ing trade agree­ments,” he told The Globe and Mail in the hall of the U.S. Capi­tol. “I know the Pres­i­dent thinks the trade deficit is an im­por­tant in­di­ca­tor of the fair­ness of these trade agree­ments. I’m not sure that view is broadly shared.”

Some have ac­cepted that there is no chang­ing the Pres­i­dent’s mind on the deficit. The game, in­stead, is to get around it with­out do­ing any harm to trade – such as by boost­ing ex­ports with­out re­strict­ing im­ports.

Pa­trick Ot­tens­meyer, CEO of the Kansas City Southern Rail­way Co. – which does much of its busi­ness haul­ing goods back and forth across the U.S.-Mex­ico bor­der – sug­gests tak­ing ad­van­tage of the open­ing of the Mex­i­can en­ergy mar­ket by sell­ing more oil and gas to Mex­ico.

NAFTA’s chap­ter on en­ergy cur­rently only ap­plies to the United States and Canada – Mex­ico wouldn’t sign on to it in 1994 be­cause, at the time, oil and gas were un­der a gov­ern­ment mo­nop­oly; bring­ing Mex­ico un­der the en­ergy chap­ter could en­trench the coun­try’s re­cent open­ing up to for­eign oil com­pa­nies and en­cour­age more U.S. firms to get in on the ac­tion.

In his dis­cus­sions with Com­merce Sec­re­tary Wil­bur Ross, Mr. Ot­tens­meyer said, he got the im­pres­sion the ad­min­is­tra­tion would set­tle for such a so­lu­tion. “You’re not going to talk him or the ad­min­is­tra­tion out of their fo­cus on the trade deficit, but [his mes­sage was] ‘Help me un­der­stand how we solve that,’ ” Mr. Ot­tens­meyer said in an in­ter­view.

At a Mex­ico City con­fer­ence he at­tended in the spring with Cana­dian For­eign Min­is­ter Chrys­tia Free­land and her Mex­i­can coun­ter­part, Luis Vide­garay, Mr. Ot­tens­meyer said the mes­sage from NAFTA’s two ju­nior part­ners was that they also un­der­stood this as a pos­si­ble way around the deficit fix­a­tion.

“It was re­peated sev­eral times at this con­fer­ence,” he said. “‘We’re happy to talk about the trade deficit, but let’s talk about it in the con­text of ex­pand­ing trade, not in the con­text of re­strict­ing.’”

IVAN PIERRE AGUIRRE/AS­SO­CI­ATED PRESS

Work­ers man­u­fac­ture car dash­boards at a fac­tory in Ci­u­dad Juarez, Mex­ico, in 2013.

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